1.1 million UK households could be in ‘debt peril’ by 2018

A modest increase in interest rates could render almost 25 percent of UK households in severe financial stress, according to a report published on Thursday. The Bank of England (BOE) has confirmed that such rate hikes are imminent.

High levels of household debt – resulting from consecutive years
of easy credit – mean even a moderate rise in interest rates
could create profound financial struggle for one in four
households in the UK which will be simply unable to sustain their
mortgages, a report from the Resolution Foundation (RF)
reveals.

The RF, an economic policy think-tank intent on improving the
standard of living for 15 million Britons on low and middle
incomes, warns that Britain’s “household debt hangover”
must be prioritized as the “holiday period” of low
borrowing costs comes to a close.

The think-tank's concerns are compounded by the governor of the
Bank of England’s cautionary claim on Wednesday that household
debt is a “major risk” to the UK economy, and could
drive Britain back into recession when interest rates rise.

Bank of England governor Mark Carney noted that many UK families
are financially vulnerable, having overstretched their budget to
get on the property ladder. A significant rise in loan or
mortgage rates would impact on public spending, reversing the
economy’s recent upward trend, he said.

If interest rates remain low for a prolonged period, Carney
believes Britain’s housing market could become dangerously
over-inflated. In a stern warning to borrowers, the governor
confirmed that the first increase in interest rates Britain has
seen since 2007 is imminent – irrespective of related risks.

“The UK economy is starting to head back to normal,” the
governor stated. “As the economy normalizes, Bank Rate will
need to start to rise,” he continued.

Carney assured the BOE will introduce interest rate rises in a
“gradual and limited” fashion. Such an approach will
soften the impact for severely indebted borrowers, he claimed.

But the governor cautioned that dramatic hikes in interest rates
which occur more rapidly than predicted could “tip the
economy into recession” because citizens who are
experiencing financial strain will limit their spending elsewhere
to sustain their mortgages.

Carney highlights that it is the prospect for excessive levels of
“household indebtedness” that deeply concerns the Bank.

“If a lot of people are highly indebted, that could tip the
economy into recession. Since we start from a vulnerable position
we need to be especially careful,” he said.

The governor warned that with household debt equating to 140
percent of Britons' disposable income, interest rates will remain
“materially lower” than the five percent average that
foregrounded the financial crisis. Such acute indebtedness is
“a major risk” to the nation’s economic stability, he
claimed.

Despite a five year run of exceptionally low interest rates, many
UK mortgage holders have struggled to pay their debts as a result
of a troubled jobs market and very low wage growth, according to
the RF.

Interest rates have been fixed at a steady low of 0.5 percent
since the most severe period of the Great Recession in 2009. But
the UK is currently reported to be the fastest growing advanced
economy in the world, with a rapidly expanding job market.
Consequently, many experts and commentators claim a stark rise in
UK rates is inevitable.

Reflecting on the precarity of Britain's economic recovery,
Carney said: “The Bank is well aware that a prolonged period
of historically low interest rates could encourage other risks to
develop. In the UK, the biggest risks are associated with the
housing market.”

Britain has a history of high levels of debt.

"The country’s stock of private and public sector debt nearly
tripled from 165 percent of GDP in 1987 to 466 percent in 2008,
and the UK stood as one of the most indebted countries in
theworld as the recession unfolded,” the
Resolution Foundation’s report reveals.

And six years later, little has changed.

The think-tank argues that the number of UK mortgage holders
spending more than 33 percent of their income on debt repayments
could skyrocket from 1.1 million today to 2.3 million by 2018.

More alarmingly, the number of UK households in "debt
peril" – meaning they are allocating more than 50 percent of
their income on mortgage repayments – could mushroom from 600,000
to 1.1 million by 2018, according to the report.

When asked on Wednesday whether the first rise in interest rates
could be expected soon, Carney declined to give details.